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Mergers and Acquisitions in Canada

Sections 85 and 85.1 of the Act provide for the tax-deferred transfer of property to a corporation. Section 87 of the Act relates to tax-deferred amalgamations.

Section 85 Election

Section 85 of the Act permits the transfer of property to a corporation on a tax-deferred basis by electing the amount at which the transfer takes place for tax purposes. The transferor (seller) may be any “taxpayer,” including a non-resident person. However, the transferee (purchasing corporation) must be a “taxable Canadian corporation.” The seller must receive at least one share of capital stock of the purchasing corporation. The seller may also receive non-share consideration, which may include cash, promissory notes, the assumption of debt or any other property. Certain types of property may not be “rolled over” into a corporation under section 85, including real property or an interest in real property owned by a non-resident that is not used in a business carried on in Canada by such non-resident. To effect the rollover under section 85, the seller and the purchasing corporation must jointly execute a prescribed election form and file it with the CRA in the prescribed time. The elected amount cannot be less than the tax cost to the taxpayer of the property and it cannot be more than the fair market value of the property. In addition, the elected amount cannot be less than the fair market value of any non-share consideration received by the transferor.

Section 85.1 - Share-for-Share Exchanges

Section 85.1 allows a taxpayer (seller) to transfer shares of a corporation on a tax-deferred basis to another corporation for treasury shares of the transferee (purchaser) corporation. The following conditions must be satisfied for section 85.1 to apply:

  1. 1.     the purchaser of the “old shares” must be a Canadian corporation;
  1. 2.     the “old shares” that are being disposed of by the seller must be shares of a taxable Canadian corporation and must be held as capital property;
  1. 3.     the purchaser corporation must issue its own shares (i.e. treasury) to the seller in exchange for the “old shares” owned by the seller of any particular class of another corporation that is a taxable Canadian corporation; and
  1. 4.     the only consideration the seller receives for the “old shares” is shares of one particular class of the purchaser corporation.

Once these conditions are met, the provision applies automatically and no election is required for the tax-deferred rollover to the seller. The tax cost of the transferred shares to the purchaser corporation is the lesser of the fair market value of the shares and the paid up capital of the shares, immediately before the exchange. However, the seller can opt out of the “automatic” rollover.

The rollover under section 85.1 does not apply in the following circumstances:

  1. 1.     the seller and purchaser were, immediately before the exchange, not dealing with each other at arm’s length;
  1. 2.     immediately after the exchange, the seller or persons not at arm’s length with the seller, alone or together, controlled the purchaser or beneficially owned more than 50% of the value of all outstanding shares of the purchaser;
  1. 3.     a section 85 election was filed in respect of the transaction to which the particular taxpayer is a party; or
  1. 4.     non-share consideration was received by the seller for the transferred shares.

It should be noted that a section 85 election may provide the purchaser with a higher tax cost if the vendor’s tax cost of the transferred shares is greater than the paid-up capital of the transferred shares.

Tax Deferral for Target Shareholders

The availability of the tax-deferral benefits under sections 85 and 85.1 of the Act can often facilitate transactions since a buyer could purchase a target corporation without causing immediate tax consequences to the target shareholders. In an all-cash deal, the selling shareholders will realize a capital gain to the extent that the proceeds of disposition of their shares exceed their tax cost and reasonable costs of disposition. However, where the buyer has the ability to issue shares or cause shares to be issued to the target shareholders as consideration, the provisions of sections 85 and 85.1 could be used to provide such shareholders with the opportunity to defer all or a portion of their gain.

Although no similar rule permits a tax-deferred transfer of property to a non-resident corporation, it is possible for a non-resident corporation to offer a tax-deferral to the shareholders of the target corporation by offering exchangeable shares. Under a typical exchangeable share transaction, a Canadian acquisition company acquires the shares of the target corporation and issues to the sellers its shares that are exchangeable into shares of the non-resident parent corporation. The terms and conditions of the exchangeable shares may be designed to place the holders of such shares in the same economic position as if the holders owned the shares of the non-resident corporation (see the discussion on Exchangeable Shares under the section “Overview of Canadian Securities Legislation - Plan of Arrangement,” in Chapter 1 of this guide).


A tax deferral can also be offered to shareholders of a target company through an acquisition strategy that involves an amalgamation. Section 87 of the Act provides for the merger of two or more taxable Canadian corporations (the “predecessor corporations”) into a new corporate entity (the “amalgamated corporation”). For tax purposes, the amalgamated corporation is treated as a continuation of the predecessor corporations, standing in their place with respect to various assets, liabilities, surpluses and other tax-oriented accounts.

This tax-deferred merger under section 87 is available under the following conditions:

  1. A.     the merger must involve two or more corporations, each of which was immediately before the merger, a “taxable Canadian corporation”;
  1. B.     all of the property of the predecessor corporations immediately before the merger, except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation, must become the property of the amalgamated corporation;
  1. C.     all of the liabilities of the predecessor corporations immediately before the merger, except amounts payable to any predecessor corporation, must become liabilities of the amalgamated corporation;
  1. D.     all of the shareholders of the predecessor corporations immediately before the merger, except any shareholder that is a predecessor corporation, must receive shares of the capital stock of the amalgamated corporation; and
  1. E.     none of the foregoing requirements has been accomplished as a result of the acquisition of property of one corporation by another corporation, pursuant to the purchase of that property by the other corporation or as a result of the distribution of that property to the other corporation on the winding-up of the corporation.

Section 87 applies automatically without the need for an election to be filed.

The shareholders of each predecessor corporation (other than shareholders who are other predecessor corporations) will be deemed to have disposed of their shares in the predecessor corporations (the “old shares”) for proceeds equal to the adjusted cost base of such shares. The shareholders will then be deemed to have acquired shares of the amalgamated corporation at the price equal to the adjusted cost base of the old shares.

Triangular Amalgamations

The Act also permits the tax-deferred amalgamation of two or more taxable Canadian corporations where the Canadian parent corporation of the amalgamated entity issues shares to the shareholders of the predecessor corporations. This type of amalgamation is commonly referred to as a “triangular amalgamation.”

A triangular amalgamation can also be conducted on a tax-deferred basis under the rules in section 87 of the Act, even though the shareholders of the predecessor corporation are not shareholders of the new corporation. In this case, the amalgamation will not give rise to a taxable event resulting in a corporate level of taxes. Similarly, the shareholders of the predecessor corporation will dispose of their shares on a tax-free basis when they become shareholders of the new corporation’s parent.

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